StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Accounting Basics for Managers - Essay Example

Cite this document
Summary
A writer of the essay "Accounting Basics for Managers" analyzes the financial outlook and performance of the company for the financial years 2011 and 2010. The analysis is divided into three main categories namely Profitability, Liquidity and Gearing ratios. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.9% of users find it useful
Accounting Basics for Managers
Read Text Preview

Extract of sample "Accounting Basics for Managers"

Accounting Basics for Managers Financial Statement Ratios Analysis The financial ratio analysis is conducted in this paper which analysis the financial outlook and performance of the company for the financial years 2011 and 2010. The analysis is divided into three main categories namely Profitability, Liquidity and Gearing ratios. These ratios identify how well the company is performing financially and gives an idea about its future financial outlook by presenting the historical trend. Profitability ratios focus mainly on net profit and gross profit and what are the ratios of these profits in comparison with the sales level. Liquidity ratios identify the level of liquid assets available with the company in order to discharge its current liabilities. Gearing ratios, on the other hand highlights the capital structure of the company (Investopedia.com (2011). Operating Performance of the Home Depot In the financial year 2012, Home Depot shows impressive growth both financially and operationally. In the financial year 2011, Home Depot revenue increased by 3.53% to a striking $ 70,395 million which has resulted in the operating profit increase by 14.08%. Following its operational growth strategy, Home Depot has introduced diversity in its business. The company is showing interest in covering all the horizons of the globe by opening more and more stores in various areas of the globe as it planning to serve a diverse range of customers   2011 2010   Profitability Ratios Gross profit margin 34.47% 34.27% Net profit margin 9.48% 8.61% ROI 9.58% 8.32% ROCE 21.70% 17.67% Gross profit margin is one of the key profitability ratio indicators which indicate how well a company is in the process of utilizing its working capital in earning the desired level of profit. In order to calculate the gross profit margin ratio, the gross profit (i.e., sales less the cost of sales) is divided with the revenue of the company. As apparent, the gross profit of the company has increased slightly from the previous financial year which could be due to the fact that the cost of sales of the company increased with a bigger percentage as compared to the percentage in the revenue of the company. This could be due to increased raw materials prices from the supplier which the company could not recover from the customers through increased selling price. The next profitability indicator is the net profit margin. The net profit margin is calculated by dividing the net profit (i.e., gross profit less administrative and selling expenditure) with the total revenue. The net profit margin follows almost the same historical pattern as the gross profit margin. This is due to the fact that operating expenses of the company increased only by 0.78% during the current financial year. This shows that the company is able to curtail its expenditure and generate profits. The ROI, which is calculated by dividing the net profit for the year with the total assets of the company, shows an increase in 2011 as compared to the previous financial year. The total assets of the company increased by 393 million during the current financial year and also the net profit of the company has also increased which has caused the return on investment ratio during the current financial year. The ROCE showed massive increase in the financial year 2011 due to the fact that the operating profit in the financial year 2011 increased although no significant changes were observed in the shareholder’s equity figure. Through prudent resource management, the company has able to report higher ROCE in the current financial year. 2011 2010 Liquidity Current ratio 1.59 1.37 Acid test ratio 0.49 0.32 Working Capital 5,574.00 3,756.00 Current ratio is one of the significant ratios in the liquidity ratio analysis. The ratio puts into consideration the current assets and current liabilities of the company and analyses them. A current ratio greater than 1 presents the fact the company is able to meets its current liabilities and shows a stable and sound financial outlook. As enumerated in the table above, the current ratio of the company has always remained greater than 1 in all of its previous two financial years. This shows that the company has enough liquid funds to discharge its current liabilities for the year. The asset test ratio, or the quick ratio, of the company utilizes the same formula as the current ratio but it does not include the inventory into consideration as inventory takes considerable longer period of time to be converted into cash. The asset test ratio of the company has also followed the current asset ratio format and it has shown marginal increase as compared to the prior financial year. The working capital ratio of the company is calculated by deducting the current assets from the current liabilities of the company. The working capital of the company in both of the financial year is positive which shows that the current assets of the company were greater than the current liabilities of the company. Increase in the net working capital figure shows that the company has increased its trading volume which is also reflected in the increase in the revenue and the cost of sales. 2011 2010 Gearing Ratios Equity ratio 0.44 0.47 Debt ratio 0.56 0.53 Debt : equity ratio 0.44:0.56 0.47:0.53 The companies who have high equity ratios portray a much more stable and strengthened financial outlook. (Investopedia.com (2012). As apparent form the capital structure of the company, the company is mostly financed through debt and has tried its best to keep the debt as minimum as possible. During the past two financial years the debt of the company has increased slightly. However, the financial outlook still appears to be stable. Operating Performance of the Lowes   2011 2010   Profitability Ratios Gross profit margin 34.56% 35.14% Net profit margin 6.53% 7.29% ROI 5.48% 5.96% ROE 11.12% 11.10% The gross profit margin of the company has increase as the sales of the company have increased by 1,393 million (2.85%) during the current financial year as compared to the previous year. The cost of sales of the company has increased by 1,195 million (3.77%) which shows that the trade volume of the company increased during the financial year 2011. Net profit margin of the company has decreased during the current financial year as the operating expenses of the company escalated by 3.54% during the current financial year. This increase in the operating expenses has caused major impact on the net profitability of the company. As the net profit of the company has decreased during the current financial year, it has also adversely affected the return on investment of the company during the current financial year. Overall, the total assets of the company (including both current and non-current assets) have decreased by 140 million which is around negative 0.42% decrease. This is a negative sign for the financial outlook of the company. Return on equity of the company has shown marginal increase during the current financial year, which is due to the fact that the shareholder’s equity figure in the financial statement of the company had decreased. 2011 2010 Liquidity Current ratio 1.28 1.4 Acid test ratio 0.22 0.23 Working capital 2,181.00 2,848.00 The current ratio of the company has also decreased which is a negative sign of the company. Although, since the current ratio is greater than 1 it shows that the company would be able to discharge its current liabilities in the future, but a decrease in the ratio shows that current liabilities of the company at a greater pace as compared to the increase in the current assets of the company. Stock and spares constitute a major portion of the current assets of a company. In the financial year 2011, stocks of the company constitute around 83% of the current assets of the company. Due to the overall decrease in the current assets and current liabilities of the company, the acid test ratio of the company has also decreased. The working capital of the company has also decreased during the current year which also justifies the fact that current assets of the company has decreased. The company’s revenue has increased but the investment in the working capital does not appear to increase which is a sign that the company is overtrading. 2011 2010 Gearing Ratios Equity ratio 0.49 0.54 Debt ratio 0.51 0.46 Debt : equity ratio 0.49:0.51 0.54:0.46 If we analyze the capital structure of the company it appears that the company is almost equally financed through equity and debt. In the financial year 2011, the equity percentage has decreased from 54% to 49% which shows that the company is shifting towards financing its assets through debt. Debt is generally not considered good for the capital structure of a company as it put extra burden on the income statement of the company in the form of markup expense. Analysis If we analyze the profitability ratios analysis of the above two companies, it is apparent that Home Depot is doing much better as compared to Lowes. The net profit margin, ROI and ROE of Home Depot is considerably greater than that of Lowes which shows that the company has a greater revenue and profit generating ability. Home Depot Lowes   2011 2010 2011 2010   Profitability Ratios Gross profit margin 34.47% 34.27% 34.56% 35.14% Net profit margin 9.48% 8.61% 6.53% 7.29% ROI 9.58% 8.32% 5.48% 5.96% ROCE 21.70% 17.67% 11.12% 11.10% In addition to profitability, the liquidity of the company home depot is also greater than the lows, which is another positive financial outlook for the company. The working capital investment of Home Depot is also greater than the other company which shows that the trade volume is greater than Lowes. Home Depot Lowes 2011 2010 2011 2010 Liquidity Current ratio 1.59 1.37 1.28 1.4 Acid test ratio 0.49 0.32 0.22 0.23 Working Capital 5,574 3,756 2,181 2,848 The capital structure of both the companies is almost the same. However, the capital structure of Lowes is slightly better as majority of its assets are financed through equity. Home Depot Lowes 2011 2010 2011 2010 Gearing Ratios Equity ratio 0.44 0.47 0.49 0.54 Debt ratio 0.56 0.53 0.51 0.46 Debt : equity ratio 0.44:0.56 0.47:0.53 0.49:0.51 0.54:0.46 Share Price Movement As apparent from the above share price movement, the share price of Home Depot has always remained higher as compared to that of Lowes. Recommendation The financial analysis shows that Home Depot is managing its resources prudently and effectively. The company is making every possible effort to reduce the amount of debt in its capital structure as much as it is possible so that it does not have to bear excess cost of interest charge in its income statement. In addition, the company has enough liquid assets through which it can easily discharge it liabilities in the near future. The share price pattern of the company is also strong. Apart from slight fluctuations, the share price of the company has always remained strong and it has always awarded its shareholder with competitive dividends. Based on the above financial analysis it is apparent that the share price of Home Depot is likely to spike in the coming future and the current shareholders of the company can benefit by holding the share now and disposing off the shares in the near future. By disposing off the shares in the future the current shareholders can earn capital gain. Investors who are looking for lucrative venture to invest in should consider investing in Home Depot as from its financial outlook; it appears that the company will pay good dividends in the near future. Reference Investopedia.com (2012) Financial Ratio Tutorial | Investopedia. [online] Available at: http://www.investopedia.com/university/ratios/ [Accessed: 27 Mar 2013]. Appendix Financial Statements Home Depot 2011 2010 in million $ Sales 70,395.00 67,997.00 Cost of Sales 46,133.00 44,693.00 Gross Profit 24,262.00 23,304.00 Operating Expenses 17,601.00 17,465.00 Operating Profit 6,661.00 5,839.00 Other income 13.00 15.00 Profit before interest 6,674.00 5,854.00 Finance expense 606.00 581.00 Taxation 2,185.00 1,935.00 Profit for shareholders 3,883.00 3,338.00 Dividends - - Retained profit / (loss) - - Non-Current Assets 25,568.00 26,247.00 Current Assets Stock 10,325.00 10,625.00 Trade and other receivable 1,245.00 1,085.00 Other 1,393.00 1,623.00 Cash 1,987.00 545.00 14,950.00 13,878.00 Total assets 40,518.00 40,125 Current Liabilities Trade and other payable. 4,856.00 4,717.00 Overdrafts - - Other 4,520.00 5,405.00 9,376.00 10,122.00 Non-Current 13,244.00 11,114.00 Liabilities Total Liabilities 22,620.00 21,236.00 Net Assets 17,898.00 18,889.00 Equity Share Capital (£1 nominal) 7,053.00 6,642.00     Retained Profits 10,845.00 12,247.00 17,898.00 18,889.00 Debt and equity 40,518.00 40,125.00 - - Lowes 2011 2010 in million $ Sales 50,208.00 48,815.00 Cost of Sales 32,858.00 31,663.00 Gross Profit 17,350.00 17,152.00 Operating Expenses 14,073.00 13,592.00 Operating Profit 3,277.00 3,560.00 Other income - - Profit before interest 3,277.00 3,560.00 Finance expense 371.00 332.00 Taxation 1,067.00 1,218.00 Profit for shareholders 1,839.00 2,010.00 Dividends - - Retained profit / (loss) - - Non-Current Assets 23,487.00 23,732.00 Current Assets Stock 8,355.00 8,321.00 Trade and other receivable 234.00 330.00 Other 469.00 664.00 Cash 1,014.00 652.00 10,072.00 9,967.00 Total assets 33,559.00 33,699 Current Liabilities Trade and other payab. 4,352.00 4,351.00 Overdrafts - - Other 3,539.00 2,768.00 7,891.00 7,119.00 Non-Current 9,135.00 8,468.00 Liabilities Total Liabilities 17,026.00 15,587.00 Net Assets 16,533.00 18,112.00 Equity Share Capital (£1 nominal) 635.00 688.00     Retained Profits 15,898.00 17,424.00 16,533.00 18,112.00 Debt and equity 33,559.00 33,699.00 - - Ratios Formulae Ratio Formulae Gross profit margin Gross profit/Sales Net profit margin Net profit/Sales ROI Net Profit/Total assets ROE Net Profit/Shareholder's Equity Current ratio Current Assets/Current Liabilities Acid test ratio Current asset(except inventory)/Current Liabilities Equity ratio Shareholders Equity/Total Assets Debt ratio Total liabilities/Total Assets Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Accounting Basics for Managers Essay Example | Topics and Well Written Essays - 1250 words”, n.d.)
Accounting Basics for Managers Essay Example | Topics and Well Written Essays - 1250 words. Retrieved from https://studentshare.org/finance-accounting/1618422-accounting-basics-for-managers
(Accounting Basics for Managers Essay Example | Topics and Well Written Essays - 1250 Words)
Accounting Basics for Managers Essay Example | Topics and Well Written Essays - 1250 Words. https://studentshare.org/finance-accounting/1618422-accounting-basics-for-managers.
“Accounting Basics for Managers Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/finance-accounting/1618422-accounting-basics-for-managers.
  • Cited: 0 times

CHECK THESE SAMPLES OF Accounting Basics for Managers

The Life and Business of a Music Manager

The Life and Business of a Music ManagerSeveral musicians employ untrained, unqualified and inexperienced friends, parents, or fans as their managers.... For the protection of their positions, several managers who are apprehensive of being fired and left barely with the right to take legal action and charge for damages, may attempt at an alternative — a camouflaged contractual arrangement with the singer.... The business manager should be proficient in accounting and general business practices and should be knowledgeable and experienced in the music industry....
4 Pages (1000 words) Research Paper

Role of Benchmarking in Evaluating Managers Performance

Management Accounting Techniques and decisions Contents Role of benchmarking in evaluating manager's performance 3 Budgetary planning and control systems: impacts on business performance 5 References 8 Role of benchmarking in evaluating manager's performance The statement that manager's should be rewarded only on the basis of performance and that there should be no salary underlines the fact that the compensation structure of the managers need to be rightly linked to the performance measures designed by the company in order to achieve balanced productivity and a sustainable business which is in line with the policies and the mission statement of the organization....
6 Pages (1500 words) Essay

Accounting treatment

This report is conducted to analyze the impact of organizational fairness in accounting activities on the performance of company managers along with the impact on managers perception in return of fair treatment of the organization.... Good managers are considered as assets for the organization.... It is very important for the organizations to contain managers with positive attitude for the organizational activities regarding the fairness and legal obligations....
6 Pages (1500 words) Essay

Functioning of the Hospitality Industry

It also outlines the financial management and accounting in the industry, including some taxes imposed and cost-volume-profit analysis, etc.... he financial controllers oversee the work of the accounting and finance departments.... These professionals have to make sure the company accounting records comply with the generally accepted accounting principles (GAAP).... It is important to document all financial transactions and keep accurate accounting records to comply with state regulations such as the Sarbanes Oxley Act of 2002....
5 Pages (1250 words) Assignment

Management Accounting Assignment Help me

Actual attendance increased by 15 more persons, totaling to 85 persons. Management by exception… egates routine decisions to lower level managers, unburdening top level managers from making decisions that have minimal or quite insignificant implications to the organization.... If this is being practiced by the fraternity that hosted the event, the analysis of the variance may e left to accounting staff who is tasked only to report the variance with a simple explanation that the increase in the expense was due to increase in guest...
3 Pages (750 words) Essay

Project Management - Forming the Project Team

The store managers who will be in-charge of the inventory should have a knowledge on store keeping or inventory management, secondly they should be conversant with the use of inventory management software such as NetSuite.... In addition, the store managers should also have a one to two years experience (Kieso et al.... will need to create and fill the roles or positions of accountants who will handle the accounting duties as well as the payroll, inventory manager/ supervisor or a store manager, who will be in-charge of the company's inventory, cashiers who will use the point of sales system....
2 Pages (500 words) Research Paper

Critical Thinking 2

Mangers have always found themselves in a dilemma in determining the best moves for the organisation's success, given the… The principal agent theory tempts to explain this situation, but fails to account for the fact that consequences of the managers decision do not only result from conflict of interest.... Remarkably, managers get involved in literally unethical or Managing Earnings: Ethical Considerations Managing Earnings: Ethical Considerations The implementation of strategies to achieve anorganisation's set goals is always harder practical situation that it might appear theoretically....
2 Pages (500 words) Essay

Concepts of Budgeting

The author outlines the budget's elements, shows how to avoid padding the budget, advice for managers.... nbsp; For an accountant, a budget is “a summary statement of plans expressed in quantitative terms; it guides individuals or an accounting entity in reaching financial or operational goals....
6 Pages (1500 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us